Chapter 12, Problem 12.4BE

 (a)

To determine

Product life cycle:

Every corporation in its operational life cycle has to pass through various phases known as “Product life cycle”. There are various stages of product life cycle like introductory phase, Growth phase, maturity phase and decline phase.

Introductory phase:

In this stage, there will be negative cash flow from operations as the cash is used in operations will be higher than the cash provided by the business operations. The cash flow from the activities like operating activities, investing activities will be negative.

Growth phase:

In this stage, the company generates certain amount of cash for running the business operations. In this stage, the net income will be higher than the cash flow from operating activities.

Maturity phase:

In this stage, the volume of sales will be at its highest peak. In this stage, net income and cash flow from operating activities will be almost similar. The cash flow from operating activities will be higher. Therefore the company will plan to pay dividends to its shareholders’ or redeem a debt or even plan for buyback of its stock.

Decline phase:

In this stage, the profits and volume of sales starts to decline or decrease. The cash flow from operating activities also decreases. Therefore the cash flow from financing activities might be negative as it pays for dividend and buy back of stock. But cash flow from investing activities might be positive as the company would try to increase its cash inflow by way of selling its assets and investments.

To explain: The reason why the cash provided by operating activities likely to be lower than net income during the growth phase.

(b)

To determine

To explain: The reason why the net cash from investing activities are positive during late maturity phase and during decline phase.